Why oil will remain relevant in the future

As the world strives to kick its oil addiction, the Canadian oilpatch is doubling down on the volatile commodity.

And with due respect to conventional wisdom, it might win its bet in doing so.

Leading this year’s exodus of offshore investors from Athabasca are Royal Dutch Shell PLC and Houston’s ConocoPhillips, the latest in a long string of departures since the oil-price collapse of 2014.

The locals have been snapping up many of those assets, however, quietly repatriating the Canadian oilpatch. They’ve been getting better deals than the panic buyers of 2008, when oil hit its all-time high of $147.27 a barrel, seducing China and many offshore firms into Athabasca. (All figures in U.S. dollars.)

The Canadian firms are also boosting production at their existing operations.

Within a year, Suncor Energy Inc. and Canadian Natural Resources Ltd. will have increased their oilsands production by a combined 274,000 bbl/day.

The world is glutted with oil, of course. Even the three proposed pipelines approved in recent months by Justin Trudeau and Donald Trump still face hurdles. It seems most unlikely, for political and environmental reasons, that Athabasca producers will ever get the 1.3 million bbl/day in additional pipeline capacity they say they need to get their landlocked oil to markets other than the U.S.

And on the demand side, the transition to electric vehicles (EVs) is well underway. Over the next two decades, wind, solar and other alternative energy sources are forecast to grow 7.6 per cent per year, compared with a mere 0.7 per cent for oil. And fuel efficiency is the mantra of every automaker, aircraft builder and real-estate developer.

So what gives? Why sink money into a commodity the world is turning its back on?

Some factors to consider:

Demand and supply. The International Energy Agency (IEA) says — wait for it — that oil demand won’t actually peak for another generation, until the mid-2040s. To be sure, some forecasters see peak demand as early as five years from now. But regardless, “peak” doesn’t mean an end to oil use. It just means that demand, still substantial, will have stopped growing.

In its latest annual forecast, 2017 Energy Outlook, oil giant BP PLC predicts oil and gas will still account for about 75 per cent of total energy use by 2035. And, like the IEA, BP expects oil demand to increase over the next 18 years, albeit at gradually lower rates.

Over that time, world GDP will almost double. And rising prosperity in the emerging economies — which will drive all of the additional demand — will see an estimated two billion people lifted from poverty to relative affluence.

But that market won’t be buying costly EVs. Purchases will consist mostly of locally made, affordable Chinese and Indian econoboxes and cube vans that don’t meet Western fuel or safety standards.

“It’s the fact that two billion people, much of that in Asia, are moving to middle incomes,” says BP chief economist Spencer Dale on why oil will remain indispensable for longer than most Westerners think. In increasingly prosperous emerging economies, “people can buy their first motor car, and that drives up oil demand.”

And producers are poised to fill that demand. Oil production is expected to increase by 9 per cent by 2035 to 3.6 million tonnes per year.

Hope, hype and electric vehicles. Predictions for the number of EVs on the road by 2035 range from 100 million to 200 million. The wide range of that estimate owes to the many uncertainties about EVs.

How quickly will motorists switch to EVs? The Internet took some 35 years to be taken up by a substantial 60 per cent of North Americans by 2005. (The adaptation rate is higher today, of course.) Even the cellphone, a relatively inexpensive gadget, took about 20 years to do so. And it was 1990, 87 years after Henry Ford went into business, before 90 per cent of North Americans had a motor vehicle.

Canada and the U.S. have an impressive 20,893 recharging stations for EVs. But that still leaves about 180,000 gas stations in the two countries to be retrofitted.

Where will the vast amount of electricity come from to power 200 million EVs by 2035? The NIMBY factor is robust, and there’s no such thing as an inconspicuous power plant, wind farm or field of solar panels.

EVs account for just 1 per cent of the market. And they owe even that modest take-up to generous government rebates in Canada and the U.S.

As social-justice policy goes, it’s difficult to explain why someone who can afford a $100,000 Tesla Model S or $1.1 million Porsche 918 EV gets an Ontario rebate of $10,587 — a larger sum than the annual earnings of millions of Ontarians.

Even as environmental policy, the rebates are dubious. Annual sales of nine million EVs would make hardly a dent in total world oil consumption, in a global fleet of 1.1 billion cars and trucks on the road.

And we’re nowhere near that rate, of course. There are about 30,000 EVs on the road in Canada, several years after they were introduced. That makes talk of the imminent death of the internal combustion engine nonsensical.

Geofragility. Most of the major oil-exporting countries are politically unstable.

OPEC members will continue supplying about 40 per cent of the world’s oil for decades to come.

It’s been pointed out that in a worst-case scenario for a private-sector oil firm, it goes bankrupt. But for a country like Saudi Arabia, the world’s biggest oil exporter, and reliant on oil revenues for more than 60 per cent of its GDP, a plunge in prices risks the social and political upheaval that is currently wreaking turmoil in Venezuela.

The current oil price is about $45. Most students of geopolitics can’t see OPEC members or major non-OPEC oil producers like Russia coping long-term with an oil price of less than $50. That puts a floor under the price, the kind of certainty businesspeople crave.

And the oil price will rise. There have been several oil shocks since the 1970s. The most recent was in 2008, when the oil price hit its all-time record of $143 a barrel. There will be more shocks, each causing shortages and price hikes. The Middle East is a handmaiden to the Alberta producers who keep the faith in expecting an oil price that will once again see $100.

Bad company, to be sure. But in a business that made Franklin Roosevelt a supplicant over oil to the House of Saud, longtime sponsor of terrorists now inflicting its belligerence in Syria, Yemen and Qatar, you don’t get to pick your partners.

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